Is your small or medium-sized business grappling with cash flow issues? Sound cash flow management is fundamental for business growth, success and sustainability. A negative cash flow could spell a death knell to your operations.
There are three main principles that are key to maintaining a positive cash flow for any business: collecting the income, increasing the business income and cutting down on costs.
Still, an inordinate number of Australian businesses find themselves in the red. Just 54% have a positive cash flow. The rest have to grapple with critical cash flow issues which hinder growth prospects. For a business to flourish, you must have a system for converting your sales into cash as quickly as possible. Ideally, a business should have a float so as to cushion the balance between the incomings and outgoings. You ought to have sufficient cash flow that will give you some “breathing space” to meet your financial obligations between the incoming and outgoing amounts. Here are some measures that you can implement in your operations to maintain a positive cash flow.
Collecting the business income
Instead of wasting a lot of time and resources managing your debt, prioritize upfront payments. Not only will this drive payments and boost your cash flow, it also helps you identify some of the problem-payers. Encourage your clients to pay part of the contract in advance to boost your short-term cash flow and help you map out your types of creditors early on. Payment information can help you identify problem debtors along with the preferred debtors that will likely give you an easy time.
There are additional strategies that you can adopt to control the incomings and improve the cash flow:-
- Keep track of payments: Have a system of tracking invoices so that you can know who owes you, who is defaulting and when payments are due.
- Collect debts often: Don’t let an otherwise good debt graduate into a bad debt that is likely to cost your business. Collect what you are owed consistently in smaller chunks instead of waiting for a lump sum payment. Collecting these small chunks on a regular basis will boost cash flow and help you avoid a cash crunch while in the process of waiting for larger payments.
- Send reminders: The money that is owed to you is your money so don’t shy away from sending regular reminders or notifications for your debtors to pay up. There are lots of accounting and invoicing tools with automated messaging features that you can use to automatically send out your reminders at preferred intervals. They increase the likelihood of you getting paid. Sometimes, payments may delay simply because your debtors forgot. Regular reminders also create a sense of “urgency” and debtors are likely to prioritize your payments.
- Incentivize early payments: Do some of your customers pay early consistently? You can encourage them to continue making prompt payments by incentivizing them through discounts. It’s a win-win that helps you establish stronger trade relationships while maintaining a positive cash flow.
- Penalize late payments: Conversely, if you have customers that make late payments, you can impose penalties. Avoiding those penalties will be motivation enough for those clients to pay up early. All you have to do is specify in your payment terms that you will charge a penalty for late payments and send regular reminders of the same and your debtors will scramble to pay up in time.
Control the outgoings
The amount of expenses that you are incurring will also have a bearing on your cash flow. You must be strategic in how you spend money in the business in order to avoid running out of cash. You can realize this in multiple ways:-
- Paying your bills strategically: Paying all your bills and debts on time no doubt boosts your credit rating and helps you maintain a positive relationship with suppliers. However, you must do this tactfully. If business is booming and you have lots of cash in hand, you can chase up all your unpaid invoices and bills and settle them in time. However, if the business is cash-strapped, you must pay bills sparingly and delay some of the payments that might put you in trouble. However, it is important to be astute when deciding which bills to pay. Look at the terms and delay those with flexible deadlines before you begin negotiating those with more stringent terms.
- Avoid penalties: Penalties are a drain on your cash flow so try to avoid them where you can. Always try to settle your bills on time so as to avoid wasting money on late payment fees. Early payments also foster the goodwill you need to maintain long-range relationships with your suppliers.
Cutting business costs
Every business advisor will tell you that cutting costs is not a way to grow your business. You can’t shrink your way to success. There are business costs that are sacrosanct. These include those expenses that go towards generating your revenues and increasing your cash flow. However, if there are redundancies somewhere or if some business costs cannot be justified, cutting costs can be an effective way of increasing your business cash flow.
Evaluate your stock
Something that is most likely to deplete your cash flow is over-committing and maintaining stock that is unsellable. If you can’t sell your stock, then the money is tied up in the stocks and you are unlikely to meet your payment obligations. Watch out so you don’t stack up too much of your cash in your inventory. Also, order only the inventory that you can move within a certain duration of time. If you are importing your merchandise, make sure you also factor in the volatility of the rate fluctuations.
Offer credit card payment options
Instead of giving goods on credit and spending ages pursuing payments, offer your buyers credit card payment options and let the bank take the risk of pursuing the credit card debts. This will also boost your sales. Younger people rely almost exclusively on making purchases via credit cards.
Use other people’s money (OPM)
Sometimes, you simply have to rely on other people’s money (OPM) to boost your business cash flow, especially if the sales are not picking up fast enough. However, before you take up credit, assess the borrowing and repayment terms. Taking too much debt may end up choking up your cash flow over the long run. You also need to factor in the intended use of the loan. If you are planning to acquire costly machinery, you will be better off with a long-term loan. However, if you only need to top up your day-to-day expenses, a small short-term overdraft will do.
Have some reserve cash
It is prudent to have some cash in reserve that will serve as your buffer should you run low on cash flow. You could also take loans or have a draw-down facility to top up your cash flow should you run out of money. You need to create alternatives that you can tap into since you can’t run your business on a positive cash flow 100% of the time. Family members and friends can also serve as a financial cushion, particularly if you are running a small business. Cash reserves serve as a buffer, helping you ride out the lean times with little interruption. However, leaning back to alternative funding sources shouldn’t be a knee-jerk measure. Every measure must be carefully pre-planned and the payment terms negotiated in advance.
Assess your systems and credit rating
Do your systems stand the “stress-test”? Is your business creditworthy? If you are going to maintain a positive cash flow, you must have a strong financial profile with an excellent credit rating. It is therefore prudent to review your systems as often as possible to test their readiness for any eventual cash crunch.
Need help handling your cash flow problems? An accountant Melbourne expert can help you assess and seal the financial loopholes to gear your business towards a positive cash flow.